The Birth of Plenty: How the Prosperity of the Modern World Was Created

"The Birth of Plenty" will blow your mind. The only other book of comparable scope and depth of analysis is "The Discoverers" by Daniel J. Boorstin. In "The Birth of Plenty," Bernstein claims that "...the four factors—property rights, scientific rationalism, capital markets, and improvements in transport and communication— [are] the essential ingredients for igniting and sustaining economic growth and human progress." Three of the factors seemed quite obvious to me, but I had never before explicitly considered scientific rationalism as a pillar of prosperity - although now of course it seems entirely obvious. Bernstein spends the rest of the book backing up that assertion from the Greeks onward to the Dutch, the Florentines, the Spanish, the British, and the Americans - but also in the Latin American, Arab, Chinese, and African spheres.

His thesis provides a useful lens with which to analyze the current situation in places like the Middle East and Africa - "In all but the most exceptional cases, national prosperity is not about physical objects or natural resources. Rather, it is about institutions—the framework within which human beings think, interact, and carry on business." and "The only natural endowment that matters is a topography that is favorable to internal transport. Great mineral wealth corrodes the very institutions that promote long-term prosperity." He makes several observations which should make Americans a little nervous: "The American military presence freed Japan from the clutches of the demon that most reliably derails great nations—excessive military expenditure" and "A nation’s long-term success depends on the extension of economic opportunity to a majority, or at least a substantial minority, of its citizens."

Bernstein makes some very sweeping comments about the difference between the Western world and everyone else (which are interesting, but I don't know enough about the rest of the world to know if they're true or not), "What separates Western societies from traditional non-Western societies is not merely the love and appreciation of Greek and Renaissance culture that is touted by modern academic scolds like Allan Bloom, but rather the amount of knowledge subjected to challenge. True, in most advanced Western societies, many religious beliefs are still held to be untouchable, even among some scientists. But for the most part, the modern West can analyze and change its mind about almost anything; premodern societies can do this about almost nothing."

Some of his comments played a bit into my automation thesis - "It is a humbling truth that at any given moment, the lion’s share of Western society’s prosperity originates in the minds of a few geniuses, people who truly are one in a million. Translating their ideas into economic reality requires the staggering amounts of capital that can be supplied only by a robust financial system that is trusted by investors." (although I believe that the "staggering amounts of capital" he talks about are becoming less and less necessary). He also points out the dangers of pervasive high unemployment: "Unemployment causes unhappiness, even when income from other sources is adequate. That is to say, the deleterious effects of unemployment upon well-being are independent of income; stripping a worker of his job will, on average, make him much less happy, even if his employment income is completely replaced."

I can't nearly do this book justice with a smattering of quotes. Read this book - it will change the way you think about the world.

Preface

It took me a while to rustle up a copy of Maddison’s summary work, Monitoring the World Economy, 1820–1992. The bound edition looks as dull and as daunting as the densest legal brief, but inside, Maddison’s dry data lay out the greatest story ever told: the economic birth of the modern world.

Introduction

With the invention of the telegraph by William Fothergill Cooke and Charles Wheatstone in England in 1837, instantaneous communication abruptly altered the face of economic, military, and political affairs in ways that dwarf the changes wrought in this century by the airplane and the computer.

Until approximately 1820, per capita world economic growth registered near zero. In the centuries after the Fall of Rome, Europe’s wealth actually declined, as numerous critical technologies simply disappeared; the most important of these was cement, which would not be rediscovered for thirteen centuries.

the four factors—property rights, scientific rationalism, capital markets, and improvements in transport and communication—that are the essential ingredients for igniting and sustaining economic growth and human progress.

economic development facilitates democracy, not the other way around—“too much” democracy may actually be bad for economic growth. The rule of law is the essential bulwark of a robust system of property rights. Property rights, in turn, are essential to prosperity, which itself is the essential fertile soil in which democracy flourishes.

SECTION I - The Sources of Growth

In all but the most exceptional cases, national prosperity is not about physical objects or natural resources. Rather, it is about institutions — the framework within which human beings think, interact, and carry on business.

CHAPTER ONE - A Hypothesis of Wealth

New technology is the powerhouse of per capita economic growth; without it, increases in productivity and consumption do not occur.

From first principles, then, the question can be asked, “What is needed to develop gadgets?” Four things: Property rights. Innovators and tradesmen must rest secure that the fruits of their labors will not be arbitrarily confiscated, by the state, by criminals, or by monopolists.

The scientific method that we take for granted in the modern West is a relatively new phenomenon. Only in the last four hundred years have Western peoples freed themselves from the dead hand of the totalitarian, Aristotelian mind-set.

Since almost no entrepreneur has enough money to mass-produce his inventions, economic growth is impossible without substantial capital from outside sources.

Not until all four of these factors—property rights, scientific rationalism, effective capital markets, and efficient transport and communication—are in place can a nation prosper. These four factors first coalesced, briefly, in sixteenth century Holland but were not securely in place in the English-speaking world until about 1820. Not until much later did the four factors begin to spread over the rest of the globe.

fondly quotes one of his instructors, Dharma Kumar: “Time is a device to prevent everything happening at once; space is a device to prevent it all happening in Cambridge.” The development of each of the above four critical factors connects strongly to this fabled university. If England was the birthplace of modern prosperity, then Cambridge was its maternity ward, producing many of its principal midwives:

the breakout that occurred about 1820 from a different viewpoint. Once again, prior to 1820, there was little improvement in the material welfare of the average person. This picture is contrary to that commonly taught in the nation’s humanities departments. From the perspective of the Romance language expert or the art historian, the Renaissance appears to be the pivotal point of the second millennium. The great writers and artists of that period, however, did little to improve nutrition, to augment transport, or to prevent plague.

Put another way, world per capita GDP growth since the birth of Christ could not possibly have been as high as, say, 0.5%; if it were, per capita GDP would have grown from $400 in current dollars to over $8.6 million by the year 2000! We can be certain, then, that, for most of this period, growth was indeed very close to zero.

In premodern times, such a comeback from disaster would have been impossible: Per capita GDP in China, after flowering under the Sung Dynasty, remained flat for seven centuries after the Mongol invasion. The Western growth machine, in contrast, reduces the catastrophe of conquest to mere historical hiccup.

Medieval towns were unimaginably dangerous places, with a general level of violence so great that homicides were twice as common as accidental deaths.

Even before the partition of government power among king, parliament, and judiciary guaranteed individual liberties, the rule of law, and property rights, God and Caesar would have to be rent asunder. Fired by ideological fervor, religious wars — Catholic versus Protestant, and Protestant versus Protestant — burned through Europe for almost two hundred years. The conflicts exhausted and weakened the participants. This, in turn, paved the way for both independent secular governments and the more tolerant message of the Enlightenment.

Before 1800, lack of adequate transport did not merely threaten commerce; it was deadly in its own right. In the modern world, where food can easily be shipped from areas of surplus to areas of shortage, crop failures rarely cause mass starvation. In the Middle Ages, by contrast, one town could experience catastrophe, while its neighbor in the next valley prospered; this was particularly true of areas not favored with river or sea transport.

Government also plays a central role in the investment process by eliminating uncertainty in the cost and supply of capital. Or, as President Clinton asked of Alan Greenspan in 1993, “You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of fucking bond traders?” Yes, Mr. President, it did. William Clinton’s overwhelming 1996 reelection victory owed itself in no small part to the success of Greenspan’s monetary maneuvering.

Last, and most important, many farming communities embraced the institution of individual property rights. It is nigh on impossible for hunter-gatherers to establish discrete ownership of vast tracts of wild habitat. While many, if not most, early farming ventures were communal, we shall find that soon after the dawn of recorded history, farmers began to individually own and run their plots.

A nation reaches the industrial stage of development not merely as the result of industrialization per se but because of the existence of the vital underlying institutions of property rights, scientific inquiry, and capital markets. Once a nation has reached that stage, it has broken the chains of poverty.

CHAPTER TWO - Property

The parts of Greece that were rich in bottomland, like Macedonia and Sparta, would not develop democracy, private property rights, and individual freedoms. It was not by chance that Alexander the Great, the very antithesis and destroyer of Greek democratic values, hailed from the flat, fertile north.

We can also credit the early Greek small farmer — the geôrgos — with pioneering the ancient equivalent of the Protestant work ethic that is so familiar in American farm culture. He invested backbreaking work on the soil with nobility and honor, an unusual concept in any age.

In an era when inherited wealth and power almost always trumped intelligence and drive, the post-Mycenaean period was a brief moment when the opposite occurred. The era beginning around 1100 B.C. presented a protocapitalist opportunity to Greek peasants, and they exploited it in great numbers. By 700 B.C., as many as 100,000 small farms, averaging ten acres in size, flourished in Greece. Fiercely individualistic and antiauthoritarian, geôrgoi manifested their independence in ways that are deeply embedded in modern Western life, and they changed the course of civilization itself.

The early Greeks thus avoided the economic scourge of succeeding nation-states — high taxes to pay for military expenditures.

Although Solon did not “invent” democracy, he discovered the secret to its survival—a judiciary that was independent of the state’s power. Such a judicial apparatus could be counted on to protect the life, liberty, and property of ordinary people.

A nation’s long-term success depends on the extension of economic opportunity to a majority, or at least a substantial minority, of its citizens.

Why should we care about the brief flowering of property rights in a small, if culturally influential, region of the ancient world? Because the story informs us of three things: Vigorous property rights require an independent judiciary. An economically enfranchised citizenship is crucial to a society’s productivity. Property rights alone are not sufficient to produce vigorous and sustained economic growth.

Ostensibly, the praetor did not create the law. Roman law initially consisted of the so-called Twelve Tablets, supposedly promulgated around 450 B.C., and a thin trickle of statutes passed by popular assemblies. In practice, however, the praetor both interpreted and created the law by suppressing old causes of action or creating new ones with judicial statutes known as ius honorarium.

For the first time in history, the law distinguished between ordinary small transactions, for which simple physical conveyance (traditio) sufficed, and valuable transfers, particularly of land, for which the law required formal written conveyance (mancipatio).

During the medieval period, most Western rulers were theoretically vassals of the pope. In effect, the ruler transferred ownership of his kingdom to Rome, which then leased it back as a feudatory of the Church for tribute — in John’s case, one thousand marks of silver per year. The system was, in a manner of speaking, a holy shakedown racket. In return for this kickback, the king could count on the pope, for example, to threaten rebellious barons with excommunication. As a bonus, the Holy Father also shielded the king from the fires of eternal damnation.

modern times, the English origins of common law serve to contrast it with the “civil law,” which derived from Roman statute and predominates throughout the rest of Europe and in much of the world. The differences between common law and civil law are well beyond the scope of this book. As a broad generalization, however, common law emphasizes the primacy of legal precedent and the division of power between the judiciary and other branches of government, while the institutions of civil law are more centralized, with legislative action having primacy. The key difference between the two systems is this: Those wishing to influence the institutions of a civil law nation need only capture the legislator, whereas in a common law nation, one must influence all three major branches of government, a difficult task indeed.

In Imperial China, the situation was even worse. There, the emperor might quickly appropriate a new invention, a fate that befell the creators of printing, paper, and the bill of exchange.

Florence granted the first recorded patent in 1421 to Filippo Brunelleschi, famed designer of the Florentine cathedral dome, for the design and use of a large boat that was intended to carry marble and other goods up the Arno to the city.

From the outset, American patent procedures bested those in the mother country. Prior to the American Revolution, most of the American colonies had sophisticated patent procedures, in many cases more streamlined and more efficient than in England. After the defeat of the British in 1781, the fledgling United States stole the lead in patent law from the mother country.

In 1900, 9% of Americans owned farms; today that number is below 1%. Yet few would argue that democratic institutions in the U.S. are less stable now than they were a century ago. The reason is simple: Postindustrial economies no longer need to provide land to citizens in order to turn them into stakeholders. Ownership of nonreal property and capital, both of which are unlimited, serves that purpose nicely. Modern capital ownership can satisfy a much wider proportion of the population than could ever have been achieved even in ancient Attica, where only 200,000 acres of arable land were available to a population of 250,000. Land ownership is finite; capital ownership is limitless.

CHAPTER THREE - Reason

At base, however, the history of economics is the history of technology — after all, modern prosperity rides in the cockpit of invention. Economic growth is virtually synonymous with increased productivity, which in turn is almost entirely the result of technologic advance.

About three centuries ago, the pace of technologic innovation dramatically accelerated. The list of significant mechanical inventions prior to 1700 is a short one: The windmill, the waterwheel, and the printing press pretty well exhaust the roll call. After 1700, in contrast, inventions flowed in an ever-increasing torrent, and with them poured forth the wealth of mankind.

This reliance on the formulation of theoretical models and their subsequent testing with empirical observation became one of the defining characteristics of Western man. In a sense, just how “Western” a society is can be measured by how much of its belief system is subject to this kind of rigor.

What separates Western societies from traditional non-Western societies is not merely the love and appreciation of Greek and Renaissance culture that is touted by modern academic scolds like Allan Bloom, but rather the amount of knowledge subjected to challenge. True, in most advanced Western societies, many religious beliefs are still held to be untouchable, even among some scientists. But for the most part, the modern West can analyze and change its mind about almost anything; premodern societies can do this about almost nothing.

Bacon’s staggering genius lay in realizing three things: (1) that there actually was a problem, that the state of medieval man was in no way “natural”; (2) that the deductive system was at fault; and (3) that knowledge of the natural world could be continuously improved, and with it the welfare of mankind. Improving the lot of mankind would necessitate replacing the old Aristotelian framework with an “inductive” system in which facts would first be gathered without preconception, then analyzed.

The problem, according to Bacon, was simple: Sterile theorizing, detached from experimental data, did not rise to the task of describing the real world, because “the subtlety of nature is greater many times over than the subtlety of argument.”

He began to travel, widely publicizing his desire to settle in Basel, Switzerland. Whether or not this was a ploy to extract concessions from the Danish king is unknown, but in 1576, Frederick II, not willing to lose this national treasure, gave Brahe the island of Hvem in the straits between Copenhagen and Sweden and had the observatory of Uraniborg constructed for him there. To cement Brahe’s loyalty, Frederick also provided him with other property in the kingdom, as well as a healthy stipend.

Because Edmond Halley played key roles in the development of three of modern prosperity’s four foundations — scientific rationalism, the capital markets, and modern transportation — it is not too great an exaggeration to identify him as the central character in our story.

CHAPTER FOUR - Capital

It is a humbling truth that at any given moment, the lion’s share of Western society’s prosperity originates in the minds of a few geniuses, people who truly are one in a million. Translating their ideas into economic reality requires the staggering amounts of capital that can be supplied only by a robust financial system that is trusted by investors.

During the late fifteenth century, capital flows gradually shifted to the north, first to the Hansa cities — the area around Bremen and Hamburg, Germany. There, the Fugger family made huge fortunes from mining, then even bigger ones from moneylending. They financed innumerable wars and overseas expeditions, most notably Magellan’s circumnavigation of the globe. The list of regents who did not owe the Fuggers money in the fifteenth and sixteenth centuries was a short one. The Vatican was one of the most militarily aggressive states in Europe. Naturally, the Fuggers became its biggest creditor. At that point, the Church could no longer maintain its prohibitions against usury; in 1517, the Fifth Lateran Council abolished most strictures against lending at interest.

The final great advance of Dutch finance occurred in 1671, as Johan de Witt, who was both Holland’s grand pensionary (chief magistrate) and a crack mathematician in his own right, applied Pascal’s new theories of probability to finance. De Witt arrived at a formula that used the age of a purchaser to determine the interest paid on lijfrenten. De Witt’s rise to power itself illustrates that the Dutch understood the importance of promoting their best and brightest to high government office.

The importance of first establishing a healthy market in government debt was vividly demonstrated in the U.S. during the Civil War. In 1862, when Lincoln’s treasury secretary, Salmon P. Chase, failed to float a $500 million war issue, he called on financier Jay Cooke for help.

The pervasive influence of giant, publicly held multinational corporations virtually defines our modern way of life. In fact, one feature that distinguishes life in the developed world from that in the undeveloped world is the amount of day-to-day interaction between ordinary citizens and these behemoths.

Thus, the modern joint-stock, limited liability corporation does more than dramatically lower the risk of investing via the mechanisms detailed above. The above considerations aside, it also increases productivity by favoring lean and hungry “new men” for leadership roles over the often increasingly jaded and indolent heirs of the founding family, who may possess stock, but no substantial control.

This highlights the central feature of the capital markets of the time: High investor returns mean a high cost of capital to the company. The EIC would have much preferred to finance its voyages with cheap loans at low rates and keep the enormous profits for itself. Unfortunately, cheap capital was not available in the London of the early seventeenth century, particularly not for highly speculative ventures.

Recent market history reinforces two notions: (1) in an economic state of nature, company managers will cheat shareholders, and (2) without vigorous regulatory oversight of the securities industry by the government, investors are loath to extend equity capital.

Where there was or is no protection of personal property, there is no incentive to innovate. And even if somewhere in such a benighted land there did beat the heart of an inventor, there would be no capital to develop and bring his creations to market. All of a country’s capital would be frozen under mattresses, worn in ornament and jewelry, and most important, secured in private vaults — especially the emperor’s.

CHAPTER FIVE - Power, Speed, and Light

European governments did not phase out the infamous corvée — involuntary labor used for road construction — until the mid-nineteenth century.

Although the leading lights of the scientific revolution were highly educated, and many hailed from aristocratic wealth, the great engineers and inventors of the Industrial Revolution were almost without exception uneducated craftsmen, who were motivated mainly by the prospect of commercial gain.

Shocked clerics aside, by the year 1800, electronic communication was still out of reach. There were three major problems: Reliable sources of electrical power were not available. Scientists found it extremely difficult to fashion electrical current into usable signals. As Nollet’s experiment showed, the ability to detect and interpret those signals was crude in the extreme.

The half century from 1825 to 1875 saw more thoroughgoing change in the way people lived their lives than any other period in history. Today, we think of our own time as being one of uniquely rapid technological change. Nothing could be farther from the truth. The average citizen of two generations ago would have little trouble understanding the computer, the jet airliner, or even the Internet. By contrast, a person of the 1820s transported through time to the year 1875 would have been rendered speechless after witnessing the swiftness of rail travel and the instantaneous global communication that had been brought about in a mere half century. Never before had mankind been wrenched into the future with such force and speed as it was in the decades following 1825. Nor is it likely to happen again.

CHAPTER SIX - Synthesis of Growth

The scientific mind-set flourishes best in societies that most rapidly move information and cherish dissent and individual liberty, the fellow travelers of property rights. This link between individual liberty and scientific inquiry partly explains the paradox of how the U.S., with its narcissistic cult of the individual, continues to lead the world in scientific innovation despite a deteriorating educational system.

SECTION II - Nations

CHAPTER SEVEN - The Winners: Holland and England

For the first time since the Fall of Rome, the fruits of labor accrued largely to free republican citizens. The farmer who innovated successfully was fully rewarded. Dutch peasants could think and say what they pleased.

For the past seven hundred years or so, the largest borrowers in the Western world have been governments with pressing military needs. A government with little debt and a secure source of revenue from taxes and landholdings can borrow at low interest.

Third, Dutch prosperity did not rest on technological advance, the great engine of modern Western wealth.

Last, the Dutch political body was fragmented into seven semiautonomous states, a loose political confederation situated on the edge of a dangerous continent. The lack of a strong central bank and a vigorous national patent system carried obvious economic disadvantages. This lesson was not lost on the American Founding Fathers. The decentralized apparatus and resultant sorry political fate of eighteenth-century Holland served as an object lesson to the Federalist participants in the American constitutional debate, who saw Holland beset by “imbecility in the government; discord among the provinces; foreign influence and indignities; a precarious existence in peace, and peculiar calamities from war.”

The transfer of power resulted in one of history’s most felicitous bargains, the Revolutionary Settlement. Parliament provided William with a stable tax base to finance his war against France. In exchange, William gave Parliament legal supremacy. The Crown could no longer dissolve Parliament, and the notorious Star Chambers — Crown courts whose often barbarous rulings superseded those of common law — were abolished.

More important, both agricultural and industrial workers must have money left over after they’ve paid for food and shelter to buy the new industrial goods spewing forth.

The mechanical aspects of the agricultural revolution are straightforward enough: improved crop rotation schedules, harvesting schemes, and the like. The greatest gains came from improvements in mundane hand implements — seed drills and harvesting tools. Perhaps the most dramatic advance was the invention of the Rotherham triangular plow in 1830. Described by T. A. Ashton as “the greatest improvement in plow design since the late iron age,” this plow required only two horses driven by a single man. It replaced the traditional rectangular device drawn by a team of six or eight oxen that required both an ox-driver and a plowman. In an instant, productivity in plowing more than doubled.

The results of nitrate supplementation from animal fertilizer were yet more spectacular. Fertilizer from traditional sources — farm animals — is expensive, and it was not long before alternatives were found, first in the guano deposits from New World islands and later from synthetic nitrates.

Much literary and historical sound and fury has attended the enclosures, and although a minority of farmers were unjustly driven off their land, most historians now agree that the English concern for property rights and due process were, for the most part, observed, and that the process was on the whole fair and just. The number of small landowners increased significantly as the enclosure acts conferred ownership upon those whose families had tended the small common strips over the generations. For the first time, these smallholders enjoyed the choice of whether to sell or cultivate.

Rather, the crisis arose from economic necessity: Enclosed land produces far more food than the commons does, requires fewer farmers per acre, and thus throws large numbers of farm laborers out of work.

In a sense, there was no such thing as the Industrial Revolution or the Agricultural Revolution. Rather, there was a productivity and specialization revolution, as the glacial evolution of property rights, scientific rationalism, capital markets, and modern transport and communication gave farmers, inventors, and industrialists the incentive to innovate.

The division of manufacturing into many separate small tasks encourages technological innovation, as machines designed for a specific job are relatively easy to invent and refine. As innovators gradually improve these machines, the skill required to operate them generally decreases, which again broadens the labor pool and reduces the wages that must be paid still further.

It is likely, for example, that cheap and available cotton underwear caused the dramatic fall off in infectious disease after 1850. The most deadly diseases of the period — cholera and typhoid — are gastrointestinal and thus spread by fecal-oral contamination. They were also no respecter of social class. In 1861, Queen Victoria’s beloved Albert, prince consort, would die of typhoid. These mundane cotton articles eliminated the irritation and inflammation that had been caused by infrequent changes of single-layered clothing, cut down on disease transmission, and saved millions of lives.

Cort’s innovation freed England from its dependence on increasingly scarce wood, depriving timber-rich Sweden of its historical advantage. Previously, imported Scandinavian steel was so superior to the English product that it took both domestic and foreign manufacturers a few years to get used to the idea of a superior British product.

The progress described in both cotton and iron manufacture did not end with Crompton’s mule or Cort’s puddling process. The ensuing decades saw the evolution of an almost continuous process of improvement. Foundries grew ever bigger, required less coal per ton of iron, and put out an ever-higher quality of product. Historian Phyllis Dean beautifully summarized this process of seamless innovation: “Machines and the machines that make machines have proved to be capable of an infinite sequence of improvement, and it is this process of continuing, self-generating technical change that is the ultimate cause of the sustained economic growth that we now take for granted.”

The wretched masses of the third world suffer not because they are deficient in factories and machines but because they lack institutions — property rights, a scientific outlook, and capital markets — while at the same time their countries experience explosive population growth from their glancing encounter with the advances of modern medicine.

What Engels forgot, or likely never learned, was just how grim life was before Britain broke out of the Malthusian Trap. As bad as day-to-day existence in the early industrial slums was, it is indisputable that England’s population rose rapidly during the period. Living conditions, almost by definition, must have been far worse two centuries before that, when every increase in numbers brought a reduction in living standards that was severe enough to keep population in check.

Harvard economic historian Simon Kuznets explained this paradox with his “curve hypothesis”: Inequality of wealth and income temporarily increases during periods of rapid industrialization, as those at its vanguard prosper at the expense of the rest of society. The same sequence of events played out in the technology boom of the 1990s, which made thousands of computer-literate twentysomethings unimaginably wealthy (if only briefly) and produced great disparities of income.

The Bubble Act also forbade use of many of the “speculative tools” that were blamed for the 1720 market debacle, including short selling and futures. We now know that these devices enhance market stability and lower the cost of capital. Their absence made the British financial markets exceedingly volatile over the ensuing century.

CHAPTER EIGHT - Runners-Up

States that neither taxed their subjects too heavily nor seized their property too often found themselves with fuller treasuries and larger armies than states that did. Nations that could not refrain from plundering their subjects grew weaker, and, in many cases, disappeared.

The very first step towards prosperity, then, is a ruler’s awareness of the link between his welfare and that of his subjects. The modern developed nation is a “service state” that actively provides public goods that enhance commerce. To name a few, these are:

Education for its young

Police protection to ensure public safety and property rights

Justice administered by independent courts to assure citizen loyalty

Roads to transport labor and products

France possessed superficially robust property rights, but saw its citizens’ incentives drained by institutions that encouraged rent-seeking behavior. To this day, the Frenchman still aspires to the status of fonctionnaire—roughly, a bureaucrat endowed by the state with considerable status, benefits, and perks. Yet again, the fall of a great power had turned on tax policy.

The great industrial innovations of the seventeenth and eighteenth centuries issued from gifted craftsmen, not scientists, and therein lay another French disadvantage. In France, scientists remained an elite class, coddled by the Court and ensconced in their academies. These luminaries only rarely interacted with the general population, craftsmen, or inventors. In England, by contrast, academics and artisans freely communicated and intermingled.

Edwin Reischauer, historian and onetime U.S. ambassador to Japan, characterized Ieyasu’s shogunate, which lasted 250 years, as “a state of absolute peace, internal and external, that has never been matched over a comparable period of time by any other nation.”

As Reischauer piquantly observed, “Revolutionary reforms are easier and more fun to make in someone else’s country.”

Of greater moment is the fact that the American military umbrella allowed Japan to spend just 1% of its GDP on defense.

The American military presence freed Japan from the clutches of the demon that most reliably derails great nations—excessive military expenditure.

CHAPTER NINE - The Last

The history of economic failure is about the resistance of traditional cultures to change.

In the seventeenth century, the Turks twice besieged Vienna; the turning point in European fortunes came in September 1683, when the Austrians broke the second Turkish onslaught. Within little more than a decade, Peter the Great had captured a bridgehead on the north shore of the Black Sea, which had previously been a Turkish lake. By 1699 the Treaty of Carlowitz formalized the reduction in the size and status of the Turkish Empire.

Sometime around the fifteenth century, Muslim scholars froze interpretation of the Koran. This quiet catastrophe—a doctrine known as taqlid, the meek acceptance of previous interpretation and the closure of Islam to all future reinterpretation—crippled Islam as a dynamic social and economic force. It was as if the U.S. Supreme Court had stopped all reinterpretation of the Constitution in 1857 after the Dred Scott decision, which declared that blacks could not claim citizenship, nor could Congress prohibit slavery.

Enlightened rulers provide their citizens with critical services such as police protection, public health precautions, roads, education, and an independent judiciary. States that do so prosper; states that do not fall behind.

Holland and England were the first nations to make the conscious connection between becoming a service state and gaining power, both military and economic. France soon followed them, while Spain and Japan lagged for centuries before finally catching on. The Ottomans never saw the connection; nor has most of the rest of the Muslim world.

The Ottomans curtailed their lucrative slave trade in the nineteenth century only under Western pressure. They did not forbid slavery within their own borders until the twentieth century. Yemen and Saudi Arabia did not abolish it until 1962. To this day, estimates of the number of slaves in Sudan, Somalia, and Mauritania range as high as 300,000.

Astonishingly, in many cases modern archeologists have been able, with little effort, to reestablish water flow under artesian pressure from many of the old Roman irrigation systems, which have been dormant for over a thousand years.

Decade after decade, the Arab version of the Tragedy of the Commons — overgrazing by the ubiquitous and ravenous goat — offers up more and more marginal land to the desert.

In the past few decades the Iranians have created out of thin air an entirely new bureaucracy of ayatollahs that imitates almost exactly the modern Catholic apparatus. Perhaps, hopes Lewis, “They may in time provoke a Reformation.”

Latin America’s central economic problem, typical of the modern age, rests with its property institutions.

South America’s wars of liberation featured mass slaughter, brutal summary executions, and the public display of severed heads.

If we want to understand the problem with property rights in Latin countries, we must delve a bit further into the fundamental nature of these rights. Chapters 2 and 7 briefly touched on the fact that property rights must not merely be available, they must be efficient. That is, they must not be too expensive to obtain, maintain, or enforce.

legal scholars soon recognized that the same was true of property rights; it is less important how equitably property is initially distributed than how efficiently and clearly the rights to it are defined. For Coase, only three things mattered:

That ownership and liability be clearly defined

That property and liability can be bought and sold at will

That the expenses of negotiating, selling, and enforcement are low

So long as these three conditions were met, property would eventually find its way to those who could make the most efficient use of it, and liability would be extinguished by the person to whom its elimination was worth the most.

This is exactly what happened in England following the Norman Conquest. An increasingly efficient system of property rights allowed the gradual dispersion of English landholdings that were initially owned by a small number of Norman families. Coase and his followers were correct — in the long run, exactly who owns something is less important than how clear and alienable the title to it is. In plain English, the health of a society depends far more upon clearly understood and enforced rules than upon the apparent “fairness” of wealth distribution. In even plainer English, rule of law matters more than “social justice.”

Populist political rhetoric in Latin America contributes to the poisonous economic atmosphere. Where the avenging specter of “the people” hangs heavy in the air, improving a property or a business serves only to make it a fatter target for confiscation. Peasants who receive land purchased or expropriated by the government wind up in the same situation as any other small landowner.

Until 1890, the only source of financing for most Mexican farmers and businessmen was the family. The “impersonal” sources of finance commonplace in the Western world — small bank loans for individuals, stock and bond issues for larger companies — simply did not exist.

No analysis of why some nations lag others is complete without mentioning two factors that are not important:

Natural resources. There may well be an inverse correlation between wealth and natural endowment. Cast your gaze upon the Habsburg Empire, as well as modern Nigeria, Saudi Arabia, and Zaire, and it is difficult not to conclude that abundant natural resources are a curse... The only natural endowment that matters is a topography that is favorable to internal transport. Great mineral wealth corrodes the very institutions that promote long-term prosperity.

Imperialism. Guilt and self-loathing have become the great growth industries of the modern West. If some nations are rich and others are poor, it seems, it cannot possibly be because the former produce more than the latter do, but rather because the former have stolen from the latter. Beginning with Marx, academics and the chattering classes began to explain English (and Western) prosperity in terms of imperialist exploitation. This misconception survives to this day among those who are able to contort logic into equating the sneaker-wearing executives of the Nike Corporation with the jackbooted troops of Her Majesty’s armed forces. Even a moment’s reflection reveals, however, that this left-wing sacred cow is largely irrelevant. While colonial governments could be unimaginably brutal and exploitative, they also often brought material prosperity through the importation of the rule of law.

Institutions, not the bounty of nature or freedom from imperialist domination, separate the winners from the losers in the global economy. First and foremost, it is the degree of respect and reverence for the Rules of the Game — rule of law, equality under the law, and respect for the civil liberties of all — that determines the wealth of nations.

SECTION III - Consequences

CHAPTER TEN - God, Culture, Mammon, and the Hedonic Treadmill

Indeed, one of the strongest correlations with happiness is the perception that an individual has control of his life. The solid connection between individual autonomy and happiness has been substantiated by surveys done in scores of nations, from Argentina to Zimbabwe.

Pundits have declared the sustained high growth rates seen in these initially poor nations to be “miracles.” They were no such thing; rather, they were the normal course of events following the acquisition of open markets, rule of law, and secure property rights by a poor modern nation. If this seems familiar, recall that we’ve already screened this movie in Chapter 8 with the story of the Japanese “miracles” following the Meiji restoration and World War II.

Recall “the daughter-in-law who doesn’t speak.” The introduction of even the most basic modern technologies into a preindustrial society works miracles. Growth comes more slowly to nations that are at the leading edge of technology.

Many will object to the application of a one-size-fits-all barometer of happiness across the broad canvas of the world’s disparate cultures. Researchers have found, however, that all societies explicitly embrace and define the concept of happiness and well-being in nearly the same fashion. That should not be a surprising finding. After all, at base we’re all human... Sociologists have found that in almost all societies, the same four indicators predict well-being: economic status, employment, health, and the state of the family.

Unemployment causes unhappiness, even when income from other sources is adequate. That is to say, the deleterious effects of unemployment upon well-being are independent of income; stripping a worker of his job will, on average, make him much less happy, even if his employment income is completely replaced.

Modern man is on a sort of “hedonic treadmill.” As nations grow wealthier, they must produce an ever-increasing amount of goods and services to maintain the same degree of satisfaction among citizens.

CHAPTER ELEVEN - The Great Trade-Off

It cannot be any other way. If individuals cannot keep what they earn, they will not produce. If, on the other hand, those who produce the most are allowed to keep what they earn, inequalities will increase, and as inequality rises, societal well-being deteriorates. This is particularly true in a technologically minded world where an individual’s unique talents can be “scaled up” to an almost infinite degree by the ability to instantaneously transmit his or her output across the globe. The trade-off between vigorous economic growth and income inequality are both necessary consequences of the emphasis on property rights and the rule of law.

If wealth and income inequalities grow large enough, the average citizen’s well-being will suffer to the point that he no longer feels like a stakeholder—as happened in Argentina. The cost of enforcing property rights will then skyrocket, and at some point economic growth will begin to suffer.

Liberal democracies do have it within their power to smother prosperity, but only by income redistribution and government spending on a near-Communist scale, as occurred in England in the 1960s and 1970s.

There exists a trade-off, then, between economic growth and social cohesion. We can conceive of a “stability envelope” within which a society provides property rights and curbs taxation to the extent necessary to assure growth of its economy, but not to the point where inequalities of wealth are extreme enough to create social and political instability.

The only useful thing that the West can donate to the world’s underdeveloped nations is its institutional heritage, without which every other form of aid is wasted.

CHAPTER TWELVE - Mammon and Mars: The Winner’s Curse

It is no exaggeration that economics is the stuff of the life and death of nations. An understanding of economic development provides deep insight into the history of major power politics and explains the shape of the modern world.

The connection between wealth and power in the modern world is simple. Distilled to its essence, modern warfare is largely an industrial endeavor, and the most productive nations generally prevail.

Besides raw wealth, advanced weaponry, and brave, well-led soldiers, geopolitical dominance also requires the will to spend both treasure and blood in the pursuit of national power. In totalitarian states — in reality, most nations throughout most of history — this is not a formidable barrier.

Surprisingly, England at the height of its power belonged in the latter category. Because its forces were so much more advanced than those of its colonial opponents, Britain ran its empire on a shoestring, with military expenses below 3% of GDP.

Painfully aware of his predicament, he observed, “My power will fail if I do not feed it on new glories and new victories. Conquest has made me what I am, and only conquest can enable me to hold my position.” -Napoleon

De Mendoza’s bon mot, then, needs to be modified slightly. Victory goes not so much to he who has the last escudo as to he who can borrow it at the lowest rate of interest from his own citizens.

Both democracy and military power spring from the same source: economic prosperity, spread widely among the populace. The close association of entrepreneurial vigor and military innovation strengthens the link between wealth and power—demonstrated most recently by the extraordinary performances of the American military machine in Afghanistan and Iraq.

Raw GDP alone carries insufficient geopolitical weight — if global heft is desired, wealth must be combined with technologic advance. The cases of Russia and China illustrate that economic size in the absence of modern industrial and military technology stands nearly useless.

The rise of U.S. geopolitical power during the twentieth — the “American” — century follows as the nearly inevitable consequence of the rise of its economic power and technologic prowess. Since the U.S. and the U.K. had the world’s highest per capita GDPs, and along with them, the most sophisticated militaries, for almost all of the nineteenth and twentieth centuries, the message of Figure 12–3 is clear: In the modern world, geopolitical power becomes the province of large, prosperous, free-market nations. Totalitarian nations may temporarily acquire territory and global influence as well, but absent the solid economic foundation that only a free-market economy can provide, that power must inevitably crumble.

In an influential article in Foreign Affairs, Dartmouth professors Stephen Brooks and William Wohlforth starkly described a “unipolar” world, the likes of which have never been seen before in history. It is characterized by an American hegemony that is based on a technologically superior military machine and paid for by the world’s largest and most vigorous economy. In contrast to the ruinously expensive Roman, Habsburg, and Bourbon militaries, American global superiority costs a mere 3.5% of GDP — far less than even the 10% spent on American defense in the Eisenhower years. The authors even managed to quote Paul Kennedy: “Being Number One at great cost is one thing; being the world’s superpower on the cheap is astonishing.”

can put the terrorism threat into perspective in other ways. Even were the worst-case scenarios of nuclear terrorism realized, it would not cost the tens of millions of lives snuffed out by the ogres of the previous century: Hitler, Stalin, Mao, and Pol Pot.

Too much is made of the anger of the Arab “street.” Displeasure, if it is to have geopolitical meaning, must be transmitted through efficient vehicles of violence. Few consider that the events of September 11, 2001 also forced a reevaluation of the Muslim world among Americans. An ideologically committed American can act on his beliefs through military enlistment far easier than his rock-throwing counterparts in Rawalpindi, Cairo, or Jakarta can position themselves to harm the Great Satan.

Crudely put, states that value the rule of law and property rights tend to become both democratic and powerful at the same time. In addition, wealthy democracies resist the imperial overstretch that has plagued totalitarian nations throughout history. In doing so, liberal democracies protect their wealth and power. Finally, the aversion of wealthy democratic states to battle casualties spurs the development of advanced military technologies.

CHAPTER THIRTEEN - The End of Growth?

While the variety of possible modes of economic failure in the future is limited only by one’s ability to imagine them, betting against Western Civilization has not been a paying proposition for the past five hundred years.

CHAPTER FOURTEEN - When, Where, and Whither

IN THE 250 YEARS SINCE ADAM SMITH FIRST IDENTIFIED “peace, easy taxes, and a tolerable administration of justice” as the necessary conditions for prosperity, economists have refined his simple recipe. In the modern era, it has become apparent that technological progress is the ultimate fount of growth. By tracing the course of innovation through conception, development, production, and ultimate consumption, we can arrive at a working model for understanding economic growth. If we can understand growth, so, too, can we glimpse the dim outlines of the fates of nations. This book’s primary message is that a nation’s institutions — not its natural resources or its cultural endowment, not its sense of power or its sense of economic and political victimization, not even its military prowess — that determine its long-term prosperity and its future.

Second, innovators must have the proper intellectual tools. Just as the most skilled carpenter is hobbled without his hammer, his saw, or his level, so the inventor is impotent without an effective intellectual model with which to interpret his surroundings. Before about 1600, even the most brilliant Greek, Roman, Chinese, Indian, and European natural philosophers were not in the correct intellectual frame of mind. The soul of Western man lies not in the great literature, art, and architecture that sprang from its Greco-Roman roots, but rather in the simple willingness to subject his most cherished beliefs to the harsh light of empirical scrutiny. Today, this is what truly separates the West from the rest of the world. Glorious as Greek logic and science were, they did not yield easily to the hard facts of the real world, and they reliably failed to provide mankind with useful models of nature.

But the protection of property enjoyed in most of the modern West and celebrated by Coke, Locke, and Smith does not come so easily. Today, across the globe, it is what most reliably separates the haves from the have-nots.

theory that the convergence of commodity prices also produces convergence of prices for the three fundamental economic inputs — labor, land, and capital — is known as the Heckscher-Ohlin Model. First postulated by these two Swedish economists after World War I, it has since been confirmed by contemporary economists. This obscure theory is of no small importance in an increasingly integrated global economy.